Oil Enriched Investment Ideas

Oil prices were up over the weekend and yesterday. The catalyst this time was a report from the nuclear watchdog at the United Nations. According to the Financial Times, “The UN’s nuclear watchdog said Iran had significantly increased its production of higher-grade uranium over the past six months and had failed to dispel concerns that it was pursuing atomic weapons.”

The International Atomic Energy Agency (IAEA) reports that Iran has ramped up its production of enriched uranium. The IAEA says not only is Iran producing more enriched uranium, it’s enriching close to the level required to produce a nuclear weapon. You can read the report for yourself here. By the way, if you’re interested in why uranium has to be enriched at all, it comes down to the difference between the two main isotopes of uranium found in nature, U-235 and U-238. You can read about the enrichment process here.

Let’s not focus on uranium isotopes. Let’s focus on oil. The price of Brent Crude has stacked on 15% in the last month, mostly due to the rumblings about Iran’s nuclear programme. The chart below shows that Brent Crude is overbought, at least according to the relative strength index (RSI). An RSI reading over 70 generally suggests a security has gotten ahead of itself. Sure enough, Brent traded lower on Monday.

Brent rallies to overbought levels

Brent rallies to overbought levels

Source: StockCharts

Diggers and Drillers readers will recognise the Brent Chart. Editor Dr. Alex Cowie published a similar one yesterday. Alex has tipped two oil and energy stocks recently. He sees a big year for Aussie oil exploration stocks in 2012. He wrote the following in his weekly update yesterday:

I started tipping oil stocks last month because the oil price was sitting on the edge of a rally. Demand was growing steadily, but the supply side was falling to pieces. The problems around Iran were the catalyst for the whole thing to then take off.

It wasn’t just Iran though. Major oil exporters including Nigeria and Kazakhstan, who between them export more oil than Iran, were facing their own problems. Supply is also falling from other exporters. Political chaos in Sudan and Yemen has caused a 500,000-barrel-a-day gap in the market. That may not sound like much when the world gets through 90 million barrels each day. But the market is so tight that it could be more than enough to move prices. Production from Syria is also falling on the back of sanctions from the European Union.

With so many risks to supply, the Brent oil price is now at its highest level since August 2008. I didn’t expect it to rise quite this quickly. After such a jump I wouldn’t be surprised to see it pull back – even if just for a few weeks.

Alex was right about that. Brent began pulling back last night. But Alex’s two oil tips are travelling along nicely. If you want to know what Alex is working on for the rest of the year, he recorded a new video presentation before taking parental leave last week. You can watch it here.

And while we’re on the subject, congratulations to the good doctor. Alex and his wife Nikki welcomed April Rose Cowie into the world last Monday. April is the latest edition to the family and will be looked after by big brother Jasper. Alex puts down the nappies and picks up the keyboard when he returns to analyst duties next week.

Everything may not be fine with Iran or with the oil market. But life goes on. For example Standard and Poor’s has reviewed the Greek bailout deal and found it wanting. S&P cut Greece’s credit rating to sovereign default. Definitions still matter to some people.

The agency wrote that the €130 billion Greek bailout package, “materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring.” This is a gentle reminder that Europe’s day of reckoning has been deferred, not cancelled.


Dan Denning
for Markets and Money

From the Archives…

An Ice Age For Australian House Prices
2012-02-24 – Greg Canavan

“Supranational” Investing
2012-02-23 – Addison Wiggin

Economic Recovery Without Pain
2012-02-22 – Bill Bonner

What the Greek Debt Crisis is Really About
2012-02-21 – Dan Denning

Greek Default Therapy
2012-02-20 – Eric Fry

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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“Inflation is always and everywhere a monetary phenomenon.” This famous quote from Nobel Prize winner Milton Friedman really says it all about what is happening to oil prices and inflation.

The Federal Reserve is creating trillions of dollars in new currency to paper over the meltdown of 2008 and stave off a sovereign debt crisis in Europe. Oil is priced in dollars; so, of course, fuel prices are rising around the globe.

Oil is not getting more expensive,(or gold for that matter) it’s just reflecting the fact that the ass is really starting to fall out of the US dollar.

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